INSTRUCTOR: Mr. Konstantinos Kanellopoulos, MSc (L.S.E.), M.B.A. COURSE: FIN-210-50-S13 FinanceSEMESTER: II, 2013

Group project – Aspeon Sparkling Water Inc.

SECTION A

INSTRUCTIONS

Students will be divided into groups and are required to read the case study in Section B and to answer ALL questions in Section C. This assignment counts to 20% of the final evaluation. The questions of the case study are based on the Chapter “Capital Structure” in the Textbook “Essentials of Managerial Finance” although knowledge from the previous chapters is also useful.

Answers to the Questions should be filled in a separate answer sheet together with the underlying reasoning and calculations showing how you got your answers in order to make the marking easier. In addition to answering the questions, students are also required to prepare Powerpoint presentations and present them to the class. As a result, presentation skills will be counted positively towards the evaluation of this assignment although there will not be any negative marking for a poor presentation.

The deadline for delivering the answers to this Group projects and presenting them to the class is May 14th 2013, although earlier completion of the work is strongly encouraged due to other assignments and the preparation of the Final Exam.

This is a group project, and strong collaboration with the members of your team (although not with students outside your team) is strongly encouraged. Each team should provide its genuine work and recommendations. The policy for suspected plagiarism (copying) between groups is very severe at the UIA and it may provoke penalties.

Konstantinos Kanellopoulos2nd April 2013

SECTION B

CASE STUDY

SECTION C

1) Although Aspeon’s EBIT is expected to be $32 million, there is a great deal of uncertainty in the estimate, as indicated by the following probability distribution

Probability EBIT

0.25 10,000,000 0.50 32,000,000 0.25 54,000,000

Assume that Aspeon had only two capitalisation alternatives: Either an all-equity capital structure with $120 million of stock or $60 million of 13 percent debt plus $60 million of equity.

a. Conduct a ROE analysis. (4%)b. Now calculate the return on equity (ROE) and times-interest-earned (TIE) ratio for each

alternative at each EBIT level. (2%)c. Finally, discuss the risk/return tradeoffs under the two financing alternatives. In your

discussion, consider the expected ROE and the standard deviation of ROE under each alternative. (2%)

2) Now, use the data given in the case as the basis for a valuation analysis.

a. Estimate Aspeon’s stock price at the six levels of debt given in the case. (Hint: Use the lower half of Table 1 as a guide. Assume that all debt issued by the firm is perpetual). (2%)b. How many shares would remain after recapitalisation under each debt scenario? (2%)c. Considering only the six levels of debt proposed in the case, what is Aspeon’s optimal

capital structure? (2%)

3) Consider the usefulness of this analysis for most firms.

a. What are the major weaknesses of the type of analysis called for in the case? (2%)b. What other approaches could managers use to help determine an appropriate target

capital structure? (1%)c. Is the target capital structure best thought of as a point estimate or as a range? (1%)d. What other factors should managers consider when setting their firms’ target capital

structures? (2%)